MANAGING

CUSTOMER
PROFITABILITY

JASMINE F. P
C1L014001
YONITA PRATIWI
C1L014002
SOFHA MUNAYA
C1L014006

CUSTOMER PROFITABILITY
ANALYSIS
Measure customer profitability
Identify effective and ineffective
customer-related activities

MEASURE CUSTOMER PROFITABILITY

Profit can be measured by:
1. Region
2. Product Lines

Studies have shown that only 20% of a companys customers

contribute to profits. The remaining 80% generate losses.

Customer Profitability

MEASURING CUSTOMER
PROFITABILITY

Customer #
For Customer #102, costs
of
order
processing,
engineering/design
changes,
and
special

For Customer #114, the cost

of special packaging is 4
the norm.
The cost or
special handling is 6 the

PROFITABILITY ANALYSIS BY
PRODUCT LINE
CASE: HEALTHWAVE

Profitability analysis by product line

Case: Healthwave

Target return on
sales.............................................................
10%
Current sales
revenue.............................................................
$91,000,000
Target profit (0.10 x
$91,000,000)..........................................
9,100,000
Target
cost...............................................................................
$81,900,000
Current cost (CGS + R&D +
GS&A).......................................... 84,351,496
Target cost

L0-2 PREPARE CUSTOMER PROFITABILITY ANALYSIS

AND REPORTING USING ACTIVITY BASED ANALYSIS
Customer Profitability Analysis :
Healthwave,inc sells non-prescription pharmaceuticals
to three major customer types : 1. pharmacies
2. groceries
3. herbal therapists
Which of these customer groups is the most profitable for
HealthWave?

HEALTHWAVE SALES BY PRODUCT LINE AND

CUSTOMER
Product-Line Data
Revenue
Contribution Margin ratio
COGS ratio

Traced Product Sales

Sales of:
Non-prescription drugs
Supplements
Herbal Remedies
Traced Revenues
COGS
Contribution Margin
Contribution Margin ratio

Non-Prescription Supplements Herbal Remedies

$26,900,000
$44,260,000
$19,840,000
48.0%
39.0%
31.0%
52.0%
61.0%
69.0%
Pharmacy
Groceries
Herbal Therapists
78.0%
8.0%
5.0%
$25,514,800
$13,755,008
$11,759,792
46.1%

22.0%
83.0%
34.0%
$49,399,400
$30,140,662
$19,258,738
39.0%

0.0%
9.0%
61.0%
$16,085,800
$10,780,530
$5,305,270
33.0%

SALES AND ADMINISTRATIVE

COST ANALYSIS
The way that the cost management analysis team analyzed other
customer related costs, including these :
1. selling cost
2. marketing cost
3. distribution cost
4. general and administrative cost

SELLING COST ANALYSIS

HEALTHWAVE,INC
HealthWave sells its products using sales personnel in the field and
telephone ordering. A summary of those cost appear below. Note that
Herbal Therapists appear to have the lowest selling costs.

Sales Personnel Costs

Estimated Telemarketing
Costs
Estimate Sales
Administration Cost
Total Selling and Ordering
Costs

Pharmacy
$2,475,000

Groceries Herbal Therapists

$1,850,000
$0

65,000

55,250

9,750

120,000

297,600

62,400

$2,660,000

$2,202,850

$72,150

MARKETING COST ANALYSIS

HEALTHWAVE,INC
Marketing costs include personnel, databases, equipment, and
facilities. HealthWaves costs can be broken down into Marketing
Management Costs, Promotion and Incentive Costs, Advertising
Costs, and Catalogue Development Costs.
Herbal Therapists have the lowest marketing cost.
Cost Categories

Pharmacy

Groceries

Herbal Therapists

Marketing Management
Promotion & Incentives
Advertising

$198,000
990,000
1,200,000

$126,000
1,260,000
1,200,000

$36,000
0
0

Catalogue Development
Total Marketing Costs

0
$2,388,000

0
$2,586,000

250,000
$286,000

HEALTHWAVE,INC DISTRIBUTION COSTS

ANALYSIS
Distribution costs include packing, shipping and delivering products or
services to customers. HealthWave delivers goods using its own
trucks and a private delivery service, PackageXpress.
Cost Categories
HealthWave Trucks
PackageXpress
Total Distribution Costs

Pharmacy
$7,083,200
0

Groceries
$996,800
0

Herbal Therapists
$0
1,930,300

$7,083,200

$996,800

$1,930,300

CUSTOMER GENERAL AND

ADMINISTRATION COSTS,
HEALHWAVE,INC
Typically, general and administrative costs are not directly customerrelated. These costs can often be difficult to trace to specific
customers. HealthWave breaks them into two broad categories;
Customer Service and Manufacturing Support
Herbal Therapists have the lowest marketing cost
Cost Categories
Customer Service
Manufacturing Support
Total General &
Administration Costs

Pharmacy
$1,623,100
624,200

Groceries
$3,142,600
1,367,600

Herbal Therapists
$1,023,300
489,200

$2,247,300

$4,510,200

$1,512,500

CUSTOMER PROFITABILITY
ANALYSIS, HEALTHWAVE INC.
Finally, we put all the information together to determine which
customer-type is the most profitable. The Groceries appear to be the
most profitable customer
Traced Revenues
COGS
Contribution Margin
Selling Costs
Marketing Costs
Distribution Costs
Gen'l & Admin Costs
R&D
Customer Income
Return on Sales

$
$

Pharmacy
Groceries
Herbal Therapists
25,514,800 $ 49,399,400 $
16,085,800
(13,755,008)
(30,140,662)
(10,780,530)
11,759,792 $ 19,258,738 $
5,305,270
(2,660,000)
(2,202,850)
(72,150)
(2,388,000)
(2,586,000)
(286,000)
(7,083,201)
(996,799)
(1,930,296)
(2,247,284)
(4,510,232)
(1,512,484)
(74,400)
(643,200)
(482,400)
(2,693,093) $
8,319,657 $
1,021,940
-10.6%
16.8%
6.4%

LO-3

IDENTIFY ALTERNATIVE ACTIONS AND RECOMMEND

IMPROVEMENTS FOR OVERALL AND CUSTOMER PROFITABILITY
BASED ON ANALYSING CUSTOMER-RELATED ACTIVITIES
Based on the analysis of the information of HealthWave, there are four
alternative courses of action to improve customers profitability:
1. Continue the status quo or do nothing.
Note that keeping the status quo would result in erosion of customers
satisfaction and loyalty, and may increase losses.
Employees should understand the implications of keeping the status quo is
very important for their motivation in working

2. Drop pharmacy customers

Might provide cosy reduction or profit enhancement needed to meet the
target return onn sales.
Measures the profit impacts of dropping pharmacy customers by focusing on
the elements

3. Increase the efficiency of serving pharmacy customers

Needed to meet long-term profit targets, even there might be
additional costs.
E.g. outsourcing distribution to customers in order to disrupt
customers and retain more future market opportunities.
4. Decrease operating activity costs for all customers
By doing this, it may meet its long-term profit targets.
Activities which would be decreased: not value-added activities of
selling, ordering, and logistics activities.
Some profit will increase since the sales growth achieved by
keeping the increase of cost is low.

THANKYOU